Optimal location for water heater?

Option 1: In a utility closet near the kitchen and bath. Two baths are about 10-15 ft. away. Kitchen is about 15 ft. away. Second floor baths are directly above. All these distances seem relatively short. Advantages: hot water quickly! Hot water heater also is located above a floor drain.

Option 2: Located in the garage. Kitchen is 30 ft. away. Two baths are maybe 50 feet away. Second floor baths are directly above so maybe add another 10 feet to make it 60 feet. A hot water recirculation pump may be needed. Advantages: If the water heater blows up and leaks, the water drains out of the garage. Also there is a little bit of heat which warms up the garage. Winters here usually get to a low of 35-40F (2C) but can be as low as 20 degrees F.

Option 1 or 2?

If option 2, should a hot water recirculation pump be on a timer, say 6 to 8 am and 4 to 10 pm?

If it is a "tankless" water heater, then installing it, or them, as close to the point(s) of use as possible is one of its advantages, but ONLY because it does not take up a lot of space. A garage installation is easier to service and replace, and the sounds associated with its operation are NOT heard in the living space. If the heater "blows up" it will not make any difference where it is, the house will still have to be torn down and rebuilt, assuming you survived and can do it. A circulation system negates most advantages of a central location, especially if it is set to run only when there may be a need for rapid hot water.